Chinese Banks, Government Officials Failing to Prevent Money Laundering: FATF

By Koos Couvée and Daniel Bethencourt

Chinese banks are failing to vet their clients, monitor transactions and report suspicious activity in line with global standards, an intergovernmental group concluded in a report that also criticizes the impact of the Chinese government’s broader campaign against illicit finance.

The 280-page report published Wednesday by the Financial Action Task Force, or FATF, praises China’s laws against money laundering and terrorist financing, multiagency investigations into suspected financial crimes, and efforts to overhaul its anti-money laundering regulations in the 12 years that have followed the country’s last assessment.

But China’s AML framework still falls short in many areas and the country’s financial institutions—both public and private—largely fail to implement rules already in place, especially those pertaining to due diligence, “consolidated supervision of financial groups to ensure a robust [risk] management,” and screening of transactions for illicit activity, according to FATF.

Ross Delston, an AML attorney and consultant based in Washington, D.C., told ACAMS that the issues highlighted in the report correlate with those cited in recent U.S. enforcement actions against Chinese lenders.

“If you look at the U.S. experience with Chinese banks, a number of them have been heavily penalized,” Delston said. “This report suggests one of the reasons is that there’s not a clear understanding of risks on the part of the [bank’s] home office.”

Politically exposed persons often manage to open and maintain accounts at Chinese banks unnoticed, while transfers of funds to and from countries deemed high risk by FATF typically do not trigger additional scrutiny, the intergovernmental group found.

FATF, according to the report, also found “notable weaknesses” in Chinese financial institutions’ customer identification and verification programs, including in the context of corporate banking and beneficial ownership of legal entities seeking to open accounts.

“FIs [financial institutions] are relatively more successful in implementing measures related to recordkeeping, correspondent banking relationships, new technologies and wire transfers,” FATF found.

Despite those relative successes, FATF also found evidence of “inconsistent practices” for reporting potentially illicit transactions, heightening the risk that clients may inadvertently learn they are suspected of laundering funds or engaging in other financial crimes.

Money-laundering predicate offenses reported in STRs “seem inconsistent” with the risks facing the financial sector, as does the total volume of reports filed.

Law firms, accountancies and other nonbank financial institutions generally do not apply AML measures at all, according to FATF, and their reporting of suspicious transactions is “virtually non-existent.”

The intergovernmental group for the first time also assessed the efficacy of China’s laws and regulations against financial crime, assigning the country one of four possible scores in 11 “immediate outcomes” under a grading system adopted in 2013.

China received a rating of “substantial”—the second-highest possible score—in two outcomes, “moderate” in four and “low” in four others. FATF did not assign the country a single “high” score in any outcome.

China was rated fully “compliant” in only seven of FATF’s 40 technical recommendations for combating financial crime, “largely compliant” in 15, “partially compliant” in 12 other categories and “noncompliant” in six others, including its implementation of sanctions related to proliferation financing, corporate transparency and supervision of nonbank financial institutions.

As a result of the deficiencies highlighted in the review, which was carried out by assessors from the International Monetary Fund, China must undergo FATF’s “enhanced follow-up” procedure and regularly report on its progress in implementing the group’s recommendations.

That outcome “won’t come as a surprise to observers and banks outside of China” or immediately impede the country’s financial institutions from interacting with the global financial system, a former intergovernmental assessor familiar with the evaluation told

“The problems are real, so the most critical part of all this is how the country is going to respond between now and the next [FATF] plenary” in June, when China replaces the United States as FATF president, the former assessor said on condition of anonymity.

The report lists nine “priority actions” Chinese officials must take to upgrade their AML framework and system for receiving, analyzing and disseminating financial intelligence.

China’s “de-centralized” model of financial intelligence unit consists of the AML Bureau and the AML Monitoring and Analysis Center, or CAMLMAC, as well as 36 provincial branches of the People’s Bank of China, or PBC.

This unique “FIU arrangement” has the potential to support investigations consistently and effectively, but currently falls short “because of the standalone databases at the level of the PBC provincial branches and the limited access by these branches to CAMLMAC’s database,” FATF concluded. “Major improvements are needed.”

FATF also questioned the impact and quality of AML enforcement by the PBC, which, based on 2017 statistics, imposed an average penalty of $6 million in response to AML-related infractions.

“These are not effective, dissuasive nor proportionate given the size of the banks and other FIs in the financial sector, and the lack of initial responses to remedial measures,” FATF said.

The regulator has yet to pursue an enforcement action against an online bank or nonbank financial institution.

Contact Koos Couvée at and Daniel Bethencourt at

Topics : Anti-money laundering , Counterterrorist Financing , Know Your Customer , Sanctions
Source: China
Document Date: April 18, 2019